Premiums for higher-risk properties in the Northern Territory will almost certainly rise once the Territory Insurance Office (TIO) is privatised, industry sources have told insuranceNEWS.com.au.

Territory Chief Minister Adam Giles this morning announced the TIO will be broken up and sold for $424 million, with Allianz Australia paying $230 million for the insurance operations. The banking arm has been sold to People’s Choice Credit Union.

The sale is subject to the passage of the relevant legislation through the NT Parliament and regulatory approval.

Allianz MD Niran Peiris has pledged to retain all staff, branches and the Darwin headquarters when Allianz takes over on January 2.

Allianz has also entered into a 10-year agreement to manage the Government Motor Accidents Compensation Scheme.

There has been fierce community opposition to the sale of Australia’s last government-owned general insurer. But Mr Peiris told a Darwin press conference today Allianz will maintain the TIO brand and continue to offer flood, storm surge and cyclone cover.

“We are here to grow TIO, not change it,” he said. “Allianz is Australia’s fourth-largest insurance company, but our presence in the NT is well below that of other states.

“TIO is a perfect fit for Allianz in a business sense.”

Allianz offers workers’ compensation cover in the NT. A spokesman told insuranceNEWS.com.au it also does some commercial property business as part of its national programs and personal lines through intermediaries such as National Australia Bank.

The acquisition will give Allianz scale in the SME segment in the NT.

TIO premiums are half those of competitors for some properties with flood and storm surge risk, one broker told insuranceNEWS.com.au.

“Within the Darwin area, there are houses and units at risk of storm surge and really [TIO] are the only ones that will cover it, particularly in those exposed zones,” he said.

“Their householders’ premiums are the most competitive by quite a long way.”

Strata owners with storm surge risk could see premiums rise 50%. TIO has previously been able to negotiate favourable reinsurance rates by arguing its coastal exposure is limited.

TIO CEO Richard Harding has previously said flood premiums will rise whether or not the insurer is privatised.

The Government has pledged some of the sale proceeds will go to flood mitigation.

TIO was planning to introduce risk rating for flood next May but under the sale agreement Allianz will introduce it gradually, taking more than three years.

The Allianz spokesman says TIO has to risk rate as competitors are picking off customers with no risk who are subsidising others.

Risk pricing will ensure the TIO’s viability, he says.

Allianz can bring its technical capability in flood mapping, data analysis and risk pricing and will work with the government as it invests in mitigation in flood prone areas such as Katherine and parts of Darwin.

TIO is not regulated by the Australian Prudential Regulation Authority (APRA) but complies with APRA reporting and the annual report released last week shows its capital position is solid.

Its capital coverage ratio, which measures capital in proportion to risk, stood at 2.07% on June 30. This compares with Suncorp’s 2.16% and 1.72% for IAG.

TIO reported a $40.36 million profit, down from $98.74 million the previous financial year due to a revaluation of inflation assumptions and the discount rate for estimated claims.

The company has reported a profit for the last five years but the figure has gyrated because of revaluations on long-tail business.

This year it incurred a $62 million one-off cost to align benefits payable under the MAC scheme with the National Injury Insurance Scheme.

The insurance arm made a $22 million pre-tax profit.

TIO reports its insurance and banking operations together and says gross written premium rose 2% to $128.69 million.

Its reinsurance bill fell slightly to $49.71 million and net premium revenue rose 10% to $77.59 million.

Claims rose 29% to $61.29 million and the underwriting profit dipped 3% to $23.04 million.

The group paid the Government a $10.5 million dividend during the year, up from $3 million the previous financial year, and made a 10% return on equity.

The Senate inquiry into privatisation of government-owned assets will investigate the sale.

The NT Government plans to sell TIO under the Federal Government’s asset recycling program, which pays 15% on top of the sale price if the proceeds are spent on infrastructure.

But announcing the federal inquiry on Friday, ALP senator Sam Dastyari said the program has not yet passed through Federal Parliament.

“There are no federal funds, there is no federal legislation, and the Territory Government is showing a complete disregard for the concerns of local residents and business-owners,” he told insuranceNEWS.com.au.

“The way the NT Government is rushing this through is astonishing.”